Fate of Qantas still up in the air

SYDNEY, Feb. 28 (Xinhua) -- Despite a healthy forewarning of market tremors and regular public agonizing from CEO Alan Joyce, Qantas' announcement of massive losses, cutting loose of 5,000 employees, wage freezes and fire sale of major assets has sent shivers through the heart of Australian business.

In a scrambling bid to cut 2 billion Australian dollars in costs - also including the deferring of a critical purchase of more than 50 aircraft - all options are on the table, albeit the essential ingredient of government support still hovers distantly in the ether.

The airline said on Thursday it will take action to permanently reduce costs in all parts of the Qantas Group, including fleet and network changes, productivity improvements, consolidation of business activities, new technology and procurement savings.

More than 50 aircraft will be deferred or sold and the group's workforce will be reduced by 5,000 full-time equivalent positions over five years.

Qantas has announced its agreement on the return of its Brisbane Airport terminal lease, together with related assets, to the airport owner at a cash value of 112 million AU dollars. The broader structural review of the Qantas Group portfolio continues and no final decisions have been made on other assets.

Under fire Chief Executive Officer Alan Joyce said Qantas would do everything in its control to overcome some of the toughest market conditions it had ever faced.

"It's clear that the market Qantas operates in has changed, with structural economic shifts exacerbated by an uneven playing field in Australian aviation policy," Joyce said.

"This situation is reflected in the financial result Qantas announces today, an Underlying PBT1 loss of 252 million AU dollars for the half-year. This is an unacceptable and unsustainable result. Comprehensive action is needed in response.

"Qantas' competitors have increased capacity to Australia by 46 percent since 2009, more than double the world average, at a time of record fuel costs and economic volatility."

Margaret McKenzie, lecturer of the School of Accounting, Economics and Finance at Deakin University, said the devil is in the detail when it comes to understanding what has gone wrong at one of Australia's pillar companies.

"The results just announced have to be a consequence of poor management as well as the market failures typical of airlines."

McKenzie said, however, "(The results) should not be used by Qantas management to hold its employees or the Australian public to ransom."

By contrast, Qantas' neighboring airline, Air New Zealand, just announced a 140 million dollar profit.

While domestic competitor Virgin has better pay and conditions for its staff, it maintains profitability nonetheless, covering routes where it's competing with Qantas.

"(Qantas) has also failed to exploit the economies of scale that existed in its business by splitting and ring-fencing its services, resulting in unnecessary duplication and inappropriate cross subsidy. At the same time it has cut 'backroom' staff upon whom safety and the quality of service depend."

Sinclair Davidson, a professor of Institutional Economics at RMIT University, said the devil in the detail is the Qantas sale Act.

"Qantas is subject to the Qantas Sale Act and this does impede its business model."

Davidson suggested the solution to this problem is to repeal, or at least relax, the Act.

"This is the course of action that the government should pursue to the exclusion of any other support. Prime Minister Tony Abbott has signaled support for this option. Unfortunately it appears there is little political will in the Parliament for it."

Australia has witnessed the collapse or failure of several iconic companies and the debate over who deserves government handouts and who is to fall by the wayside is as yet unclear.

However Treasurer Joe Hockey appears to have identified four key criteria, (Is the firm subject to unique regulation that impedes its business model? Does the firm provide an essential service? Does the firm compete against foreign state-owned enterprises? Is the firm working to restructure its operations?) although how and if they will be applied to Qantas is anyone's best guess.

Davidson is hawkish on the role of Qantas in Australia. He said, "We need to be clear Qantas does not provide an essential service."

"It is true that the failure of the company would cause a temporary disruption and inconvenience to the traveling public, but very quickly we would find planes flying the same routes and providing much the same service."

McKenzie said, "If the government cuts Qantas loose by repealing the 49 percent limit to foreign ownership, any government stake in Qantas should cease then, including the proposal of a debt guarantee."

"The Australian public should accept that unlike many other countries it no longer has a national flagship carrier. Qantas workers would then be added to the long line of unemployment that this government is chalking up."

The strike - during a Commonwealth Heads of Government meeting in Perth last year - did a good job of changing public perceptions of Qantas as the flagship anyway, as people switch their loyalties away.

McKenzie believes that "this was the fate of British Airways when (former British Prime Minister Margaret) Thatcher privatized it."

"If the government makes the call that Australia needs a national carrier as most countries have, then it needs to treat it as other countries do and take full control."